Costs 'put future LNG projects at risk'

A MCKINSEY research report says the cost of building LNG projects in Australia has risen 30 per cent in a decade, putting new investment at risk.

AAPMay 28, 20137:32pm

THE economy could miss out on as much $180 billion of investment in new liquefied natural gas (LNG) projects because of soaring costs in Australia.

Just days after Ford announced it was pulling production in Australia in 2016 because of rising costs, a new report shows the cost of building new LNG projects has increased by 20 to 30 per cent in the past decade.

The research by McKinsey & Company estimates more than $180 billion worth of LNG projects on the drawing board in Australia could be lost to competitors in North America and East Africa.

Realising these projects in Australia would increase gross domestic product by $320 billion over the next 12 years, create about 150,000 jobs and bring in tax revenues equivalent to nearly half the total federal debt, the consultancy says.

This would come on top of existing and already committed LNG projects in Australia that are expected to contribute $520 billion to the economy over 2015-2025, creating 180,000 jobs.

"However, while industry is eager to extend the resources boom through development of additional LNG projects, Australia's high cost base threatens the financial viability of many of these projects," the report released on Tuesday says.

It says since the last round of LNG investment in Australia went ahead, new competitors have emerged, particularly in North America and East Africa.

The cost of building new LNG projects has increased "tremendously" in the past decade and is now about 20-30 per cent higher than competitors in those two regions.

"This has been driven by a number of factors, including some which are beyond our control - for example, the exchange rate," the McKinsey report says.

"The higher costs jeopardise the chance of potential projects being built in Australia, and the economic benefit that this would bring."

The report considers a number of options to close the cost gap, particularly through increasing productivity that has been in long-term decline.

It says the world, and especially Asia, will need more natural gas in the coming two decades.

"Australia faces a choice. With effort and a willingness to tackle the productivity gap, it can continue to create significant wealth from LNG," it says.

"If the window of opportunity closes, much economic gain will be lost."